CVS won't be selling off PBM after scoring big win

WHAT IT MEANS AND WHY IT'S IMPORTANT — Why is the news that CVS Caremark has secured the mail-order and specialty prescription drug benefit for Federal Employee Program so important? Well, some pundits might say there is no indication that the integrated retail-pharmacy benefit manager model had anything to do with why FEP chose Caremark over Medco. It doesn't matter. As any football coach would say, "A win's a win," and this is a big one.

(THE NEWS: CVS Caremark lands PBM contract with FEP. For the full story, click here)

Starting January 2012, CVS Caremark will handle the $3 billion mail-order and specialty prescription drug benefit for the FEP, which previously was handled by rival Medco Health Solutions for the last three years.

As the news rang out throughout the industry, several observers agreed that it was a big win for CVS Caremark. Adam Fein, founder and president of Pembroke Consulting, said it reinforced his "view that Per Lofberg is leading a successful rejuvenation of Caremark's PBM business."

Citi Investment Research analyst Deborah Weinswig not only raised her price target on shares of CVS Caremark but also stated that CVS Caremark has made major improvements in customer service since it last had the mail-order contract, and those improvements were "a major factor" in the win and could help Caremark gain more contracts after disappointing results in 2010 and 2011.

Meanwhile, it was reported that Newton Juhng, an analyst at FBR Capital, lowered the 2012 EPS estimate for Medco Health Solutions by 33 cents to $4.72 and its revenue estimate by $3 billion to $70.1 billion. Juhng said he held Medco Health Solutions shares as his Top Pick for more than eight months but, with the loss of the FEP contract to CVS Caremark, it would be a considerable challenge for Medco to make up the $3 billion of annual revenue and 9.8 million annual mail-order prescriptions.

Clearly, this is a major win for CVS Caremark, and that should, or could, cool down calls for CVS to sell or spin off Caremark.

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